This Aircraft Disaster Could Hurt This Major Airline
The news is tragic with new Boeing aircraft crashing, perhaps due to a flaw in the aircraft design. That means airlines are scrambling as the Associated Press recently reported,
“American Airlines Nasdaq: AAL) is extending cancellations of flights through April 24 due to the grounding of Boeing 737 Max aircraft, as federal regulators continue to investigate two deadly crashes involving the plane model.
American has 24 Boeing 737 Max aircraft in its fleet, and said Sunday that it will be canceling about 90 flights a day. Not every flight that was previously scheduled to be on a Max aircraft will be canceled, and some flights scheduled to fly on other aircraft types may ultimately be canceled. The airline said it will contact affected fliers directly.
Aviation authorities around the world grounded Boeing 737 Max aircraft earlier this month following deadly crashes involving the plane model in Ethiopia and off the coast of Indonesia, which occurred within five months of each other.”
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“Teams from the three U.S. airlines that own 737 MAX jets headed to Boeing Co’s factory in Renton, Washington, to review a software upgrade on Saturday, as U.S. regulators prepared to receive and review the fixes in coming weeks.
The factory visits indicated Boeing may be near completing a software patch for its newest 737 following a Lion Air crash that killed 189 people in Indonesia last October. This month, a second deadly crash involving an Ethiopian Airlines MAX in Addis Ababa triggered the fleet’s worldwide grounding.
Timing for when passenger flights will resume remained uncertain. Boeing has come under global scrutiny along with the U.S. Federal Aviation Administration (FAA), the agency that must approve the software fix and new training.
Meanwhile, Southwest Airlines Co, the world’s largest operator of the MAX, began parking its fleet at a facility in Victorville, California, at the southwestern edge of the Mojave Desert, to wait out the global grounding. Southwest has 34 of the jets; United Airlines has 14 and American Airlines has 24.
Acting administrator Dan Elwell told lawmakers last week that the FAA expected Boeing would complete its upgrade as early as March 25, kicking off the approval process.
An FAA spokesman said Saturday that the agency expects to receive the software fix early next week.
A U.S. official briefed on the matter Saturday said the FAA has not yet signed off on the upgrade and training, but the goal is to review them in coming weeks and approve them by April.
It remained unclear whether the software upgrade, called “design changes” by the FAA, will resolve concerns stemming from the ongoing investigation into the March 10 Ethiopian Airlines crash, which killed all 157 on board.
The U.S. official said planned changes included 15 minutes of training to help pilots deactivate the anti-stall system known as MCAS in the event of faulty sensor data or other issues. It also included some self-guided instruction, the official added.
The Allied Pilots Association (APA), which represents American Airlines pilots, said it has been in talks with Boeing, the FAA and airlines to get the airplanes flying again as soon as possible with an acceptable level of safety.
“Right now we’re in wait-and-see mode to see what Boeing comes up with,” said Captain Jason Goldberg, spokesman for the APA, part of a delegation of airline safety experts and pilots set to test the upgrade. “We’re hopeful, but at the same time the process can’t be rushed.”
Boeing said on Saturday it was continuing to schedule meetings with all 737 MAX operators.”
This could be one problem weighing on shares of AAL.
The longer-term chart shows that a break of this recent support could lead to a significant down side move in the stock.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
A Bear Call Spread in AAL
For AAL, we could sell an April 18 $30 call for about $1.30 and buy an April 18 $32 call for about $0.50. This trade generates a credit of $0.80, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $80. The credit received when the trade is opened, $80 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $120. The risk can be found by subtracting the difference in the strike prices ($200 or $2.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($80).
This trade offers a potential return of about 66% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if AAL is below $30 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $120 for this trade in AAL.